Demand chain management
Demand chain management
Purpose of this assignment is to analyse the case study of the Dell Inc, relating to the seven questions asked on the case study. Objective of the case study analysis is to get a deeper understanding of the Global production, outsourcing and logistics. 2.Company overview
Dell is a global information technology company that offers its customers a broad range of solutions and services delivered directly by Dell and through other distribution channels. Their focused is to provide technology solutions that are more efficient, more accessible, and easier to manage. Dell Inc. is a holding company that conducts its business worldwide through its subsidiaries. Their global corporate headquarters is located in Round Rock, Texas. In terms of the PC manufacturing market, DELL is at number 3 position (Behind HP & Lenovo) with annual revenue of USD 62,071 Million. They made a net profit of USD 3,492 Million for the year 2012, which would translate to a net profit margin of 5.6%.
Dell focuses on 4 main market target segments.
Small & medium business 24%
Table 2.1 – Dell Inc’s marketing segments
The product portfolio of Dell consists of selling Servers, Networking, Storage, Outsourced services, Project Management, Support & deployment services, Infrastructure, Cloud, Security services, Applications, Business Process services, Client devices: notebooks, workstations, tablets, smartphones, and desktop PCs For the purpose of the case study, the focus will be on the products & distribution of personal computers.
3.Case study questions
3.1.1.What are the advantages to DELL of having manufacturing sites located where they are? A company once decided to place their productions overseas, must make a decision to whether to centralize their production or to de-centralize it over different countries. A company will look at 3 areas in making this decision. •Country factors
oLocation Externalities : Skilled labour technology
oFDI rules & regulations
oExpected exchange rate stability
oMinimum Efficient Scale
oFlexible manufacturing/Mass customization
oServes Universal needs(Hill, 2011)
Dell Inc which have a product with lower fixed cost of manufacturing, lower minimum efficient scale and with low requirement for mass customization or flexible manufacturing will opt in for decentralization. Also considering the product factors, Dell has a product which has a lower Value-to-weight ratio and a product which needs to be customized to each market, which indicates the requirement for the De-centralized strategy. Decentralize/Centralize decision will be influenced by the company’s own objectives. Dell specify their objectives as •Generating cost efficiencies,
•Delivering products faster,
•Better serving their customers
•Building a world-class supply chain.(Annual Report, 2012) In order to
cater to these objectives and support product factors and technology factors, Dellhas taken the decision to De-centralize. Once the decision to decentralize has been taken, they will go ahead with selecting the countries where they will try to exploit the country factors listed above to their advantage. Current locations where Dell has their production facilities are as follows: •Austin, Texas;
Advantages exploited from each of these locations can be listed as below 126.96.36.199.Market Access – Generating cost efficiencies, Delivering products faster, Dell main objective is to deliver products faster while generating cost efficiencies. The growth countries and regions that they have highlighted are BRIC countries (Brazil, Russia, India, and China). The strategy they have used is to keep best possible market access these strategic regions. Analysing the location they have selected following advantages can be seen. •Texas is central to all of the U.S;
•Malaysia is central to the huge Asia-Pacific region.
•Lodz Poland close to the big markets of the UK, Germany, and France. •Brazil, India and China plants are set up to reach the respective markets quickly
188.8.131.52.Labor costs and quality:
•China is a low cost manufacturing location
•Texas is cheaper than Silicon Valley
•Malaysia is cheaper than Singapore
•The quality of labor is high in each of these locations as well. Besides having well-educated workers, engineers and technicians, each location has little or no labor union activity. •They have also ignored industry clusters such as Sao Paulo (Brazil) and Shenzhen (China) to ensure that labour markets are not tight and expensive.
184.108.40.206.Transportation and telecommunications infrastructure: •The Texas locations, for instance, are in close proximity to major highways and to a major Federal Express distribution center. •Telecommunications bandwidth, cost, and quality are also factors, especially for call centers and data centers.
•Major incentives were offered by Texas
•financial incentives were offered in Brazil by the state government •Tax holidays in Malaysia
3.1.2.What are the potential disadvantages of the locations? Political turmoil
Political stability is a requirement for a production location. Countries such as Brazil may be affected by unstable political situations. If shutdown, a Whole region will be effected Economical Instability
Operations may be effected from economical stability of its countries, especially European region with the current EURO debt crisis. E.g DELL had to close down it Ireland manufacturing arm in 2011, after laying off 2000 employees. Expiration of Government concessions
One of the key reasons to locate the production facilities where they are is due to concessions offered by government. Most government concessions will be expired after a particular period, after which operations might be unfavourable. (e.g Texas, china, Malaysian operations). In such situation net expenditure may drastically rise, making financially unfeasible. Why does Dell purchase most of the components that go into its PC market from independent suppliers as opposed to making more itself (Dell does little more than final assembly of components into PC)?
Dell purchases many of their products and all of their components from third party vendors. Main reasons for Dell purchasing them from independent suppliers are;
1.Reduce the risk of having large inventories, which can become obsolete quite quickly – In the IT industry generally new products are introduced to the market very rapidly. Therefore exsising products can become obsolete quite rapidly, with the introduction of new products into the market by competitors.
2.Reduce the inventory holding cost- Inventory holding cost includes cost such as warehousing and logistic cost, insurance cost, spoilage and breakage cost etc. However since Dell carries extremely lower level of inventories their inventory holding cost have been reduced to a grater extent.
Majority (95%) of Dell’s supplier’s located at closer to the Dell’s factory and most of these suppliers have to supply the products to Dell within 90 minutes after placing the order. This has also helped Dell to reduce their inventory to a greater extent and has enable Dell to practice Just In Time (JIT) manufacturing.
3.Reduce the cost of co-ordination compared to vertical integration – As Dell does not have its own factories, they are not incurring any expenditure by way of establishment expenses, administrative expenditure etc, which generally carries relatively large amounts. Also Dell has been able to reduce the cost of controlling and cost of coordination to a greater extent which otherwise would have to be incurred, if they have been vertically integrated.
4.Obtain flexibility in terms of cost, quality, quantity, delivery, capacity, support etc, as they are purchasing items from several different suppliers depending on the requirement and circumstances. Dell openly shares its daily production schedules, sales forecasts, and new-model introduction plans with vendors using Electronic Data Interchange (EDI)’s. Dell’s forecast of supply is normally 75% accurate and if in case it is wrong, “Demand Shaping” is done to overcome the situation.
5.Reduce the cost – Dell purchases 75% of their purchases from 30 main suppliers (15% of their suppliers), and generally maintains several single-source or limited-source supplier relationships, either because multiple sources are not readily available or because the relationships are advantageous to us due to performance, quality, support, delivery, capacity, price etc.
Majority of these suppliers are from Asian countries that have relatively lower labor cost and this has been helped to reduce Dell’s cost to greater extent. Also due to the large volumes that are purchased, their is high bargaining power over their suppliers which has resulted in Dell obtaining vendor rebates and discounts which too have resulted in Dell reducing the cost to a greater extent.
6.Reduce time to market compared to competitors – Time taken to release a new product to market is a critical success factor in IT industry. Since Dell is purchasing most of their components independent suppliers, Dell is able to introduce new products to the market as and when new components are introduced by suppliers.
As a result of Dell’s effective supply chain management, they don’t have any warehouse and also their factories have only 72 hours worth of inventory. Also cash conversion cycle (time between an outlay of cash for parts and collection of payments) of Dell is negative 36, where as in industry it is 30 days. Also their inventory turnover has remained around 107 times where as in companies such as IBM it is 17.5 times. What are the consequences for Dells cost structure and profitability of replacing inventories with information?
In year 2004, Dell has been able to achieve the lowest inventory levels in the industry that was only three days of inventory on hand, compared to 30, 45, or even 90 days’ worth at competitors. This was a critical advantage in the computer inventory, where component costs account for 75 percent of revenues and typically fall by 1 percent per week due to rapid obsolescence.
Replacing inventory with information has contributed greatly to Dell’s business model; it is the cornerstone of their cost structure. Reducing inventory also reduces the need for working capital thus replacing inventory with information boosts profitability. Another aspect of dell’s customer focus was build to order philosophy. Every dell pc has been built this way unlike many other companies who build for sales forecasts. To offer build to order system, companies must have cell manufacturing – team of workers who build each PC from start to finish rather than a typical assembly line production. Cell manufacturing in which one group of people is responsible for building a pc.
Among other things cell manufacturing allows you to build to order in an efficient way. Dells original inspiration was to go direct but that only got it off the ground. Dell has made crucial innovations in its business model as it has grown these successive innovations have made it prosper not its adherence to a single rigid idea standards based technology as a point of market entry is one of those crucial points. Then dell began to implement a new model. Its operations had always featured a build to order process with direct sales to customers but dell took a series of ingenious steps to eliminate its inventories.
Three golden rules of dell are disdain inventory, listen to the customer, never sell indirect. Note that disdaining inventory was number one. Because of computers and the way they handle information zero or near zero inventory control is going to be a major business factor in the coming years and dell lead the way. Inventory is a drag on any business and particularly pure internet based businesses need no inventory on hand. Inventory means capital investments and that investment is a formidable challenge to any start up. Further holding considerable amount of inventory in a business increase the overall debt position of firms and force them to incur massive amount of interest cost.
The strategy to minimize inventory is the only way to maintain start up cost and interest cost at an acceptable level. In the short run it will permit more start-ups because smart companies with tiny inventories come online with minimal capital investment and Dell’s strategy of direct sale through online was a good example for the above. Dell actually funds its operations in large part by maintaining zero inventory.
It bills customers immediately but pays suppliers 36 to 45 days later. So it can flat an enormous amount of cash on which it earns a significant amount of additional interest. Besides reducing and reversing capital investment, zero inventory means that stock depreciation and obsolete a central concern in high tech is almost on problem. Maintaining zero inventory naturally keeps a company more agile. In fact true zero inventory keeps a company on the knife’s edge of responsiveness which is where dell likes to be. Dell’s model demand comes first supply second.
1.Inventory acquisition and holding cost
4.Obsolete inventory written off
1.Gross profit and net profit margin
2.Higher return on investment
4.Higher EBIT margin
What is the source of Dell’s competitive advantage?
A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and services that justifies higher prices. Michael Porter suggests that accompany can adopt one of the three strategies: Differentiation, cost leadership, or focus in finding its competitive edge. Dell mass produce its components to keep the cost minimum, while postponing the assembly of the computers till the customer final orders are received. The model enabled Dell to gain competitive advantage ahead of competition with “Low cost structure and customer experience”. Dell’s global business model which is admired by world-over has positions its production plants close their key markets in order to reduce shipping and transport costs and access to labour markets on low wages and with high productivity.
The JIT inventory enabled Dell to reduce heavy investments on large inventories and warehousing. Short channel length and optimized supply chain process reduces cost of doing business further internet sales which generates major revenue inflow is an low cost sales channel helped Dell immensely in gaining cost leadership in the industry. Dell offer customers unique experience with its responsiveness through assembled-to-order, speed and convenient purchasing cycle online. How secure is this advantage ?
Dell’s practical and economical model combining mass production and customization is a key strength which is well executed by effective integration of business plans aligned with supply chain resources. Evolvement of lean supply chain can give Dell with its drive for innovation to capitalize heavily and come up with better business model enhancing value proposition to the customer. Similarly fast-paced technological developments too will be opportunities for Dell to enhance their competitive advantage. Internet sales channel can further expanded with Brazil and China consisting of one of the largest internet populations of the world. Product life cycle of PC market is at maturity stage and global trend is consumers are demanding for more convenient devices. Treats from low cost new entrants and rivalry among competitors make Dell, more reputed and admired organization to stand tall.
Pressure from USA on China on exchange rate, China and Brazil growth as a middle income nation can impact the low cost labour and competitiveness of the product. Lack of culture driving innovation in countries they operate limits options for Dell to move value added services to lost cost labour countries like how HP has moved its design and R/D centre to Singapore. Anti-globalization ideology of China could impact Dells business future. For reputed organization like Dell, Green SC, ethics and CSR will require additional investments will increase their cost structures. In conclusion, we are of the view that considering above situation, Dell’s competitive advantage is not secure and could impact their current advantages.
07. What are the potential risks associated with Dell’s global supply chain strategy? How can these risks be mitigated? Supply chain risk can be defined as follows:
“Unforeseen events that might interrupt the smooth flow of materials.” (Waters, 2008) Unlike local or company-specific risks, system-wide risks are those which significantly disrupt supply chains across multiple operations and a wide geographic area. Systemic risks are created or magnified by the way supply chain systems are configured.
So they are not easily resolved by individual acts. In today’s globalized and interconnected world, any major disruption; from a disease to a fire, has the potential to cascade through supply chains and permeate other systems. According to the research of consulting firm Accenture in 2006, over 50% of executives surveyed felt that the risk of supply chains had increased as a result of their globalization of business operations & also significant supply chain disruptions have been found to cut the share price of impacted companies by 7% on average. Further Accenture research done in 2012 indicates that more than 80% of companies are now concerned about supply chain resilience.
The World Economic Forum in 2012 conducted a detailed survey on Supply Chain Risk across Europe, North America and Asia via the World Economic Forum’s Supply Chain Risk Radar. The aim was to understand how the risk landscape varied across the three regions and compared with the top five global risks from 2011. Survey respondents considered global risks and their potential to cause system-wide disruptions in global supply chains. According to the survey the following top five disruption figures in 2012 were identified:
What risks is Dell exposed to through its supply chain
•Government Regulations / Legal decisions
• Currency / Interest rate volatility
• Country Financial Risks
• Political & Social Disruptions
• Corporate Governance issues
• Disruption of key supplier / partner
• Theft of intellectual property
• Natural disasters
Risk Why Dell is exposedMitigates
Government Regulations / Legal decisions
50% of the major suppliers are in Asia (Developing countries)
Close study on the changes in regulations & the political situation of the countries invested in and limit expansion if the conditions are adverse Currency / Interest rate volatility
200 suppliers of which 50% located outside USA
Supply on determined fixed prices for a specific period of time Forward exchange rate contracts
Theft of intellectual property
85% of the sales are done through the internet
Depend on a resilient core network, appropriate communication tools, and an element of redundancy. 34 This requires IT systems that are scalable, secure and re-routable Natural DisastersMany suppliers & factories
Adequate insurance protections
World Economic Forum, Building Resilience in Supply Chains January 2012
Dell’s effective supply chain management has enabled them to reduce their cost to a greater extent, which has in turn helped them to improve its international competitiveness. Also effective supply chain management has enabled them to increase the value creation to the customer by providing a faster and better service to the customer. When determining the production locations, consideration must be given to country factors, technological factors and product factors prior to finalizing the decision.
Strategiclocations of Dell’s production facilities have helped them to minimize cost, improve product quality and enabling better delivery channels. Furthermore Dell’s strategy to purchase components from independent suppliers has facilitates strategic flexibility and helps the company to avoid the problems and costs associated with vertical integration. However unlike locally operated companies, global operatorslike Dell, has system-wide risks which could significantly disrupt supply chains across multiple operations and a wide geographic area other than the inherent company specific risks. In conclusion it is important that global companies like Dell should continue to mitigate these risks and achieving a better supply chain management through close alliances with suppliers and customers in striving for long term business competitiveness.